Question

Aerospace Dynamics will invest $150,000 in a project that will produce the following cash flows. The cost of capital is 10 percent. (Note that the fourth year’s cash flow is negative.) Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

  

Year	Cash Flow
1		$	45,000
2			57,000
3			65,000
4			(48,000	)
5			140,000

a. What is the net present value of the project?

Answer 1

The NPV of the project is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the NPV is computed as follows:

= - $ 150,000 + $ 45,000 / 1.10¹ + $ 57,000 / 1.10² + $ 65,000 / 1.10³ - $ 48,000 / 1.10⁴ + $ 140,000 / 1.10⁵

= $ 40,996.33 Approximately

Using financial calculator, the value is arrived as follows:

In CF0 please enter - 150,000

Press down arrow key and in C01 please enter 45,000

Press down arrow key and in F01 enter 1

Press down arrow key and in C02 please enter 57,000

Press down arrow key and in F02 enter 1

Press down arrow key and in C03 please enter 65,000

Press down arrow key and in F03 enter 1

Press down arrow key and in C04 please enter - 48,000

Press down arrow key and in F04 enter 1

Press down arrow key and in C05 please enter 140,000

Press down arrow key and in F05 enter 1

Now press NPV key, in which it will ask for I, in which we shall enter 10.

Now press down arrow key and then finally press CPT key.

The NPV will be 40,996.33

Feel free to ask in case of any query relating to this question

Press down arrow key and in C01 please enter 45,000

Press down arrow key and in F01 enter 1